Core Laboratories Inc (CLB) 2009 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Core Labs Q2 2009 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Demshur, you may begin your conference.

Good morning in North America, good afternoon in Europe and good evening in Asia Pacific. We would like to welcome all of our shareholders, analysts and, most importantly, our employees to Core Laboratories' second quarter 2009 earnings conference call.

This morning's call marks our 60th earnings release and our 15th anniversary of being a publicly traded company. During this time period, our share price increase has increased over 14 fold, and this is a goal that we will pursue for the next 15 years as well.

This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO. Also this morning we are again joined by Core's COO, Monty Davis, who will give a detailed presentation of our operations.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements and then we will come back and give a brief consolidated company overview, touching on some financial and operational highlights. And we will have a couple of comments regarding Core's strategic operational and technological positioning for the third quarter of 2009 and then into 2010.

Dick will then follow with a detailed financial overview and additional comments regarding our third-quarter 2009 revenue and earnings guidance. Then Monty will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services and then, highlighting some of Core's operations around the globe. Then we will open the phone for Q&A.

So I will turn it back over to dig Dick for some comments regarding forward-looking statements.

Thank you, David. Before we start the conference this morning I will mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the Company's business outlook.

These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2008, as well as the other reports and registration statements filed by us with the SEC.

Now with that said, I will pass it back to David.

Thanks, Dick. Core's operations once again outperformed the global marketplace as we maintained our industry-leading operating margins and continued to generate high levels of free cash. All in all it was a good quarter. And we congratulate our operations team and all of our hard-working employees.

The remainder of 2009 will still present a challenge but Core's operations are well-positioned and technologically focused for this difficult operating environment. Let's remember that Core's long-term operational and technological focus has been outside of North America, as 70% of the Company's revenues originate from petroleum reservoirs located outside of the United States.

Also, 70% of the Company's revenue originates from crude oil-related projects and over 85% of the Company's revenue originates from development and production-related operations. For the past 15 years Core believes that exploration-related activities are just too volatile, risky and cyclical to base any long-term pressure entities on.

In addition, the Company's top five clients -- those being Exxonmobil, BP, Shell, Chevron and Totale will continue in 2009 and 2010 with large internationally-based crude oil developments that should provide a good stable operating base for our international operations.

Also of note internationally has been Core's decision to deemphasize Russian operations several years ago and a significant downsizing of our Nigerian and Venezuelan operations. Specifically in Venezuela, Core was awarded but refused to accept a $7 million contract during this quarter as the Company continues to decrease our exposure in this market. The increased difficulties of converting local currency into hard currencies and transferring hard currencies out of Venezuela has led to this contractual decision.

Moreover, the company will continue to deemphasize and downsize Venezuelan operations in the near future. Dick will have some more comments on lessening our liabilities in Venezuela in his prepared comments.

In North America, Core's primary operational focus has been on Deepwater crude oil developments in the Gulf of Mexico and our technological focus has been on the big five unconventional natural gas shale plays. In the Deepwater Gulf of Mexico, Core has worked on or is currently working on projects relating to nearly every deepwater development including the emerging exciting lower tertiary play in the ultra deepwater offshore in Texas and Louisiana.

Also in North America Core's technological focus has been on the big five unconventional natural gas shale plays -- these being the Barnett, Fayetteville, Haynesville, Marcellus and the Muskwa in Canada. Core believes these shale plays can be economically developed at current natural gas prices and that decreased drilling and completion costs over the next several quarters will continue to boost returns.

Core's proprietary and patented completion and stimulation-related technologies have continued to gain market acceptance and market share, which is helping mitigate the severe downturn in North American drilling.

On the corporate side, Core's low capital expenditure requirements provides the Company with additional flexibility during these industry downturns. In 2009, Core's CapEx needs will now total less than 3% of the Company's revenues against long-term industry averages of more than 10% of revenues.

Our $15 million to $17 million requirements in CapEx now planned for 2009 which is down from our prior guidance of $20 million will fully fund maintenance to our existing capital base, and fund projects that have the best growth prospects over the next several years. Almost all capital is focused on operations that do not rely on North American sourced work.

Moreover, our $15 million to $17 million CapEx plan for 2009 will be $6 million to $8 million less than our anticipated depreciation total, adding to our free cash generation. The Company will continue to stress free cash flow and free cash generation and returns, as we recognize these attributes are most sought after by Core's current shareholder base.

To this end, Core's generated over $80 million of free cash during the first half of 2009 -- the highest six-month total ever recorded by the Company. This compares to $124 million in free cash for all of 2008.

So Core will probably -- Core will surpass 2008 total by significant margins. And this total could've been $7 million higher but the Company made a strategic decision to purchase that amount of high-grade high-quality steel tubulars for our advanced perforating gun systems.

Core's critical supplier are going -- they are going to limit production over the next year. And we wanted to ensure an uninterrupted supply of high-quality products as other suppliers could not meet the specifications required by Core. Although the decision affected quarterly free cash flow by $7 million, our clients and Core will benefit in the end.

Looking ahead for the third quarter 2009, Core's operations sees activity levels and workflows outside of America to remain constant from Q2. Operating income margins for the Company are projected in the 26% range, indicating that our global pricing structure remains essentially constant.

North American markets will remain under pressure from lower natural gas prices and we expect to see a lower average number of North American rigs running in the third quarter, when compared to those in the second quarter.

However, recent production data indicates that North American natural gas supply is now decreasing and will continue to decrease over the next several quarters. In addition, North American rig counts appear to be stabilized.

So with that now being said, I will now turn it back over to Dick for a detailed financial review.

Thank you, David. If we look at the financials in the press release we see that revenues were $167.3 million in the second quarter versus $197.7 million in the second quarter last year and $178.9 million last quarter. So our revenues were down 15.4% year over year although those results are quite favorable when compared to the dramatic decrease in industry activity levels.

And sequentially, our revenues did suffer from the more typical seasonal patterns with the second quarter being lower than the first quarter, but only by 6.5%, primarily due to the Canadian breakout.

Of these revenue services for the quarter were $134.7 million. That was down year over year when compared to $154 million in last year's second quarter -- a decrease of $19.3 million or about 12.5%. Sequentially our service revenues were down just 5%.

Product sales for the quarter were $32.6 million, down 25.4% when you compared to $43.7 million in the last year's second quarter. Sequentially our product sales are down just 12.4%. And remember that our product sales have the greatest exposure to the North American market -- a market where average rig count was down over 50% from last year's peak activity levels. You can see that our sales have held up very well in this declining market.

Moving onto cost of services, for the quarter they improved to 62.7% from, 64.9% year over year and 64.8% for all of 2008. The improvements were primarily driven by a focus on reducing our cost structure to maintain margins on slightly lower revenues.

And cost of sales in the second quarter, they were 75.5% of revenues versus 71% in last year's second quarter and 69.7% for all of 2008. This increase in cost of sales is reflective of lower product sales being run through our manufacturing cost structure.

G&A at $6.7 million, down 7% from last year's second quarter of $7.2 million, also from a focus on our cost structure. For 2009, expect G&A to come in around $32 million.

Depreciation and amortization for the quarter was $5.9 million, up from $5.3 million incurred last year in the second quarter, which reflects increased levels of capital expenditures during 2008. We expect [depreciation] for all of '09 to total approximately $23 million to $24 million.

Other income this quarter is in the amount of $6 million, which includes FX gains of $2.9 million and a $2.5 million recovery, as a result of a settlement of a contingent liability. But we have removed these two gains from our adjusted earnings for comparability discussion purposes as our guidance given last quarter excluded any gains or losses from FX movements or other one-off events.

EBIT for the quarter after excluding the two gains was $46.3 million, which was slightly better than our guidance for the quarter. Including the adjusted items our GAAP EBIT for the quarter was $51.7 million, down 6.2% compared to our second quarter 2008 EBIT of $55.1 million.

Now let's talk about margins. As David mentioned, our second quarter adjusted EBIT represents operating margins of 28%, which is the same as last year's second quarter. The Industry Group, however, has reported on average margins that have significantly contracted.

Interest expense was the implementation of APB 14-1 as we discussed in detail on our prior calls was $3.8 million for the quarter. Keep in mind that $3.6 million of that $3.8 million is non-cash or about $0.10 a share. Last year second quarter's interest expense was $8 million as reported on the same APB 14-1 basis, which also included a $3.3 million writeoff of debt issuance costs.

We expect interest expense in 2009 to be approximately $15.2 million with $14.6 million of that or about $0.40 on EPS being non-cash.

Income tax expense was $17.9 million, which is an increase over the prior year's second quarter expense of $14.7 million due to a higher effective tax rate this quarter of 37.5%. And the effective tax rate for the quarter was primarily impacted by a discrete item relating to the deferred tax assets that we no longer believe will be realized primarily in Venezuela.

We expect our effective tax rate for the remainder of 2009 to be in the 32% range. Net income for the quarter as adjusted was $28.7 million which was below last year's second quarter adjusted income of $34.8 million.

Earnings per share as adjusted was $1.24 -- $0.01 higher than Main Street estimate. And this also compares to the $1.42 earned on that comparable basis in the second quarter of last year. So earnings are [up] just 13% year-over-year.

Now, if we look at the balance sheet, cash was $103.2 million which is up $67.1 million compared to our year end balance of $36.1 million. We plan to use our cash for continuing the stock repurchase program, paying cash dividends to our shareholders and perhaps repaying some of our indebtedness. We continue to exercise a bit more caution during these current economic times.

Receivables stood at $123.9 million, down from $144.3 million at the prior-year end, primarily due to sequentially lower revenues this quarter. The DSOs in the quarter remain strong and were 67 days compared to 73 days for the prior-year.

Inventory was up $2 million from our year-end balance of $34.8 million, due to our opportunistic purchase of high-grade steel that David mentioned. Excluding this large purchase of raw materials, inventory turnover remained fairly steady at 3.5 times for the first six months of 2009.

Other current assets increased to $24.5 million up about $4 million from $20.4 million at year end. The increases associated with additional deferred tax assets recorded for normal accrual items in the first half of the year. PP&E or intangibles, goodwill and other long-term assets is also up from the year-end balance by approximately $4.5 million, which is also a result of increased long-term deferred tax assets.

And now to the liability side of the balance sheets. Our accounts payable were $26.8 million, similar to last quarter but down from the year-end balance, primarily due to a runoff of capital items and slightly lower business activity levels.

Our current liabilities of $52 million are down from the year-end balance of $54.1 million, due to the recovery of $2.5 million associated with the settlement and the contingent liability. Long-term debt changed only due to the new accounting treatment for debt. Indebtedness now stands at $201.7 million versus $194.6 million, although the face value or the amount actually owed the know holders is unchanged from last quarter at $238.7 million, the difference being just that new accounting treatment.

Net debt to total cap now stands at approximately 23.4%.

Our coverage ratios continue to improve from 10 times in 2008 now to 14 times in the second quarter. Other long-term liabilities ended at $52.4 million, up from $43 million from our prior year end, primarily due to an increase in unearned revenues from billings or Reservoir Management studies.

Equity ended the quarter at $236.9 million, up from the year-end balance of $188.3 million. The increase was caused in the most part from net income generated during the first half of '09, offset partially by our share repurchase program.

Using annualized net income for the second quarter, our return on equity is approximately 49%. And this is certainly one of the most highest returns earned in the industry. Capital expenditures for the quarter were $2.7 million, down from $8 million in the prior-year second quarter. We expect CapEx in 2009 to be approximately $15 million to $17 million, reflecting the decrease in expected industry activities. And this is down as David said from our prior guidance of $20 million.

Now looking at cash flow, cash from operating activities in the quarter was $36.2 million and after paying for our $2.7 million in CapEx, our free cash flow was $33.5 million and it was $80.9 million for the full first half.

On a per-share basis, our free cash flow in the first half equaled $3.49 per diluted share, up from $2.44 per-share in the first half of '08. So more than a 41% increase in free cash year over year.

The annualized yield on a per-share basis at quarter end on this first half cash flow was approximately 8%. During the first half, we used our $80.9 million in free cash flow to pay $4.6 million in dividends to our shareholders and repurchased $8.9 million in shares.

And it was just announced a special dividend of approximately $17 million that will be payable next month.

And now I will turn the call over to Monty Davis, who will provide more in-depth operational review.

Thank you, Dick. Our business continued to outperform the market in the second quarter of 2009. Our very dedicated employees have made the most of this market by bringing increased value to our customers with the best technology, products and great customer service. We thank all of our employees for their achievements.

All of the following discussions excludes the effects of foreign exchange translation gains or losses to yield direct comparisons. Revenue of $167.3 million generated operational earnings excluding foreign translation gains of $46.2 million. While both of those are down from 2008, we were able to maintain an operating margin of 28%.

Our Reservoir Description revenues of $103.5 million were down 9% from the same period last year. Operating earnings of $29.6 million were up over the second quarter of 2008 as were operating margins at 29%.

Most of our international operations continue to see high levels of activity with few exceptions. The Middle East continued to be very active with natural gas developments from tight-gas sands and enhanced recovery projects for oil reservoirs. We have been working on core and fluids from Iraqi oil fields that international oil companies are bidding to operate. These analyses are very important to define the reservoirs and the conditions of the fields that are being bid on.

Deepwater West Africa activity from Angola, Cameroon and Gabong have been very strong with both Core and Reservoir fluids being analyzed in our Aberdeen laboratories. Core from Deepwater Equatorial Guinea have mostly been analyzed in our Houston Advanced Technology Center. The Houston Advanced Technology Center is also working on a major Deepwater Mediterranean project on a giant natural gas field.

Activity in Asia Pacific has remained robust in India, Malaysia, Indonesia and Australia. Most work in India is related to new field development and involves core analysis and Biostratigraphy to define the age and origin of the geologic strata.

In Malaysia we're working cores and fluids and Reservoir fluids originating in reservoirs for many locations in Southeast Asia. The major area of decrease revenues for Reservoir Description in Q2 was Canada. Our oil sands and conventional markets are significantly down with only gas shale activities increasing over 2008.

Our US Reservoir Description operations continue their very good performances with large volumes of work sampling and analyzing Reservoir fluids from Deepwater reservoirs. These analyses are critical to optimize production, assure flow and maximize returns at the refineries.

The market continued to grow for Core analysis in the Deepwater Gulf of, Mexico, and we continue to analyze cores from many Deepwater reservoirs in the world in our US laboratories. Analysis of gas shale cores including cores from potential international fields also continues to be very active.

Our Reservoir Description group is well-positioned in the US in the active parts of the North American market. Our Production Enhancement operations are more exposed to the North American market and revenues of $52 million are down 27% from second-quarter 2008. This was a much slower decrease than the overall North American market which saw a greater than 50% increase in active drilling rigs.

Operating earnings of $13.8 million generated an operating margin of 26% in Q2 2009. Our patented Hero, Superhero and Superhero Plus charges continue to prove to be the best available perforating charges in the industry. A major independent operator recently reported that by switching to our Superhero perforating charges in a North American gas shale reservoir, they saw their fracture breakdown pressure drop 31% and their pump rates increase over 200%.

These improvements from a change in perforating technology led to large cost savings due to the need for significantly less horsepower at the service on the frac job. That is delivering real value.

In the second quarter we delivered large orders of perforating charges and gun systems to Iraq for use in the southern oilfield and also to India for use across the country. Our Reservoir Management revenue of $11.8 million equaled that of Q2 2008 and we saw a slight increase in operational earnings to $3.1 million, resulting in a 26% operating margin.

St. Mary Land and Exploration Company announced a successful completion of its first operated horizontal Eagle Perch shale well. The Briscoe G18 in Webb County, Texas. The well produced an average rate of 5.6 million cubic feet equivalent per day over a seven-day initial flow period during which the well's facility constrained. Core Labs' Reservoir Management Group has performed the reservoir characterization work on the St. Mary land and Eagle for -- for St. Mary Land and Exploration Company's new discovery in our Eagleford shale joint industry project.

We are providing St. Mary with geological, petraphysical and completion stimulation analysis and interpretations designed to optimize the production from this new shale reservoir. This builds on our expertise in the Eagleford developed through our earlier work for [Petrol] Hawk on their Eagleford discovery in La Salle County, Texas.

It is nice to see this play developed after we highlighted the Eagleford potential to our members of our North American gas shale projects all the way back in October 2007 when large and strategic acreage positions were still available. During Q2, we added seven companies to our Marcellus gas shale study bringing the total to 27. We added two companies to our North American gas shales study, bringing the total to 65. And we added three companies to the Haynesville gas shale study to bring the total to 36. We also started our study of the Eagleford gas shales with eight members.

Core believes that there are five major gas plays in North America. These big five being the Barnett, Fayetteville, [Haynesville], Marcellus and the Muskwa in Canada. Using the methodologies developed in North America, we initiated our global gas shale study with seven members.

The initial focus area is Europe with Turkey, North Africa, Asia Pacific and Australia default. The development of gas shales could bring a significant supply of gas to Europe. These studies generate commitments for future revenues for our Reservoir Description and production enhancement operations as well as our Reservoir Management Group.

DeShonta, we will now open the call for questions.

(Operator Instructions). James West, Barclays Capital.

David, in North America for the most services we have seen pretty big pricing declines but my sense is that your perforating guns and your charge business you really haven't seen a deterioration.

I guess first is, is that accurate? And do you think even at this lower level of rig count that you can maintain pricing?

Yes, James. It is a blending of the HERO line of products gaining more market acceptance and market share. Of course those have good value pricing on those. As Monty mentioned, the large independent that saw not only deliverability of the reservoir go up from using the charges but also looking at decreased costs, significantly decreasing costs, of fracing that well with 31% less horsepower needed at the surface.

So, you are getting a blended mix of additional better value priced product being sold into the market, even though the volume of total perforating charges are going down in the North American market. And our guidance looking at Q3, where we do say that margins might ebb a bit, that would be led with maybe a 200 to 300 point margin decline in North America and maybe 1% internationally.

That is the way we see it kind of washing out right now.

And that is because of the volumes mostly and not the pricing?

Correct. Yes, the pricing has remained constant really across all of our sectors globally.

Okay and then just one final question from me. You mentioned in the press release about IBM projects and that Core doesn't participate in those because they are lower margin. I guess if we look at an area like Mexico where I think you have seen increases and if we think about an area like Iraq, which most people are suggesting could go down the IPM route, does that put you at a competitive disadvantage not being involved in IPMs? Is it better for you? How does that play out?

We don't directly participate in those because it seems like when anybody has ever asked us to join does it the first thing they say is, "How much are you going to discount your prices?" We believe that we are the best in class in providing these services and products that we do and that, ultimately, even in an integrated project management scope we will be used outside of that project.

For instance, as we are being used in Iraq right now and just, worldwide, our 10 clients they are involved in integrated project management. Yet we don't participate in those but we do provide all of the supporting core analysis, reservoir fluids and in many cases some of the perforating charges, gun systems and fracture diagnostics technology outside of the IPMs.

I just want to give you a little more color. You mentioned Mexico in particular. We talked about in the past where we deemphasized some of our Reservoir Description services because they just weren't profitable. We had talked on prior calls how we are now doing that work primarily now in the Houston facility.

Right now Pemex is back into our top 10 client list. So I don't want you to think that we have left Mexico, we are just making sure that we approached that market and assure we have the highest profitability. And the IPM route for us does not get us there.

Okay, that makes sense. Very helpful. Thanks, guys.

Mark Thomas, Simmons & Co.

Good morning, guys. Just on the Production Enhancement segment, let's say the North American rig count stabilizes in Q3 and slowly creeps higher in Q4. Under that scenario, would you expect the segment to creep higher as well?

Yes.

Okay. And then, can you guys just remind us of what percentage of your revenues you obtained from doing some initial work on various fields and then pitching that to clients and then maybe how that percentage has changed from one year ago?

You are talking about our consortium studies that we mentioned like the gas shale?

Well, I thought some of your business you go out and you do some initial work and then pitch those fields and studies to your clients.

Yes, in the past market if you look around the globe we probably have had our hand in doing earlier work for that client. And we have identified 400 fields worldwide that we have worked in, but we would like to become more involved over the next, say, decade.

What we will do is we will go and bundle up work we're already done, use that as a basis to go ahead and pitch a long-term project. For instance, it might be for enhanced oil recovery, pressure maintenance project. So for us we add about -- let's say right now, we work in about 950 of the world's 4,000 fields. We add between 40 and 50 fields a year. And in our most recent global operations meeting held in June, that is holding up to be about the same percentage of adds.

You remember, these additional 400 fields we have identified and will be pitching over the next 10 years are all international, located outside of North America, and almost all of them exclusively crude oil-related. So we do not see a decrease in the international theater in the acceptance of the work we are pitching versus, let's say, the past five years.

Thank you, that is helpful. Dick, can you tell us how much stock was repurchased in the quarter?

What I had here was just year to date. So it is about $8 million or $9 million worth.

And then lastly, you guys have done a great job in providing shareholder returns historically. With the recent announcement of the second special dividend within the last year, coupled with the fact that you guys expect business to trend slightly lower in Q3, has your philosophy changed with respect to the repurchase shares versus special dividends?

No, no. Not at all. And just to be clear in the special dividend. It was one year ago that we did the first one so this is the anniversary date of that one and it has really been based on talking with shareholders about preferences on how to enhance value to [them]. And we felt the special dividend this time would address some of the interest of some of our constituents.

Thank you very much, guys. Good quarter.

Neal Dingman, Wunderlich Securities.

First question is on the third quarter guidance. Dave, which is on this Core guidance does this include any particular large -- what I would call incremental wins or does it really just sort of include known quarters activity which you have down there.

And then sort of centering on this, just wondering on activity out there both international and domestic. In general, you mentioned about international perhaps remaining rather flat and maybe domestic being down a bit.

What are you assuming on sort of calls -- I don't even now if I want to call them bids out there but just sort of calls and activity levels you are seeing today versus early this year.

As you know, the average job length within Core Laboratories is about six weeks. So the third quarter guidance does not take into account any large ones that might occur. We usually have a rollout of our quarters. We don't really have any big inputs of revenue that can juice a quarter.

So it is just going to be more of the same and we anticipate adding some additional work internationally as some of those projects drop off. If you look at international activity year over year, it's down around 10% from the oil industry activity level. And we have held our revenues pretty much to that level or above.

So we do not anticipate any large additional wins -- just additional carryout of the international revenue stream. With respect to North America, if the drilling level, activity level does level out we anticipate that, because we are adding additional services and technology, that we can grow in a stable rig environment. We can grow and will grow our North American revenues.

And so we will see how the quarter plays out and then in the fourth quarter with the North American rig count. But again is that does stabilize probably could see some increase in our revenue and and profitability base.

And then one additional -- especially, when you talk about the joint venture study in the Eagleford shale, I wonder how soon you have seen -- doing other sort of similar studies where after doing sort of what I would call an initial study like that you start to see some incremental business? Perhaps like maybe incremental like you did in the Barnett and sort of follow that activity, what would you foresee there?

All of these studies we generally get at least as much business outside of the study from the participants that we get inside the study. So the way that works, they are putting in a certain commitment of work when they sign on to the study.

As I mentioned, there are quite a few new ones not only the Eagleford. We started out in the international gas shale study which has a lot of room to grow. But those, we generally see at least an equal amount if not more in the first few years of the study. Afterwards it will grow more outside of the study.

But this positions us in those plays if you will and sets us as the leader, the one with the knowledge and the one with the methodology that they want to see consistently applied. So it does bring a great benefit outside of the study area.

Thanks, guys.

Victor Marchon, RBC Capital Markets.

Thank you. Good morning. The first question I have is just on North America. I know you guys have touched on, in a few of the earlier questions, but in -- in just looking at if the rig count in North America does indeed bottom in the third quarter, from what I take from what you guys have said is that -- that would also mark the bottom for you guys in both activity or revenue as well as margins. Is that correct?

Correct.

And then, if you look at it on a go-forward basis, say the fourth quarter or a number of quarters are flat post 3Q, would you be able to show margin improvement on a flat activity base as you guys have reduced the cost structure? Or would margins remain relatively flat as well?

Well, we have been able to grow our revenues about 300 to 400 points above activity levels historically. So if that is indeed the case and you do have incrementals then in our favor, the answer just from a mathematical relationship would be yes.

So it would be volume-driven in the margins.

Correct. And you saw our incremental margins historically have ranged anywhere between low 20s all the way up into the 50% range. So I think it would -- those incremental margins would be directly related to the amount of increase in revenue that we put through our system.

Thank you for that. I apologize if you guys have mentioned this already but production enhancement, did you guys split out the revenue North America versus international?

No, we haven't. We have talked about, Victor, how the international component has been growing as a result of increased activity internationally. Not because domestic US has gotten smaller but we have a pretty concerted effort to get our products out and our services out internationally. And now it represents about 35%.

So 65% North America, 35% outside. And that is up from about 20% one year ago.

Great, thank you. Last one, if I can. Just on the European gas shales, I guess broader question is to the timing as this play ramps up but specific to Core Labs is this -- is your gas shale play one to two year event for you guys? Or in one to two years you should could see some of those translate into reservoir description or production enhancement work or is it something in more of a three to five year out?

I think it depends on the success. You look at [Esso] they have a nine well drilling program down through central Europe and through Hungary. Depending on the success of that program I think it will dictate on the activity levels that we will see.

It is very, very early days. We have looked at some [rock] from those plays but I think it is too early to try to determine when that play will majority if it does.

So, stay tuned. We will update you over the next several quarters.

Thank you, guys.

Terese Fabian, Sidoti.

Good morning. I have a follow-up question on the gas shale studies. I understand they generate incremental revenue for your other segments but how and what do participating companies pay for the studies themselves? What can we expect in terms of segment revenues for Reservoir Management?

The way those studies work -- it costs to join as a consortium member. And that is about $500,000 or $600,000 per study, per company per study.

So, for instance, I mentioned that there that we added seven companies to the Marcellus. We added two to the North America, we added three to the Haynesville. We initiated the Eagleford with a -- and then we put seven into the global gas shale study at the start.

So, that is the initiation. That is not revenue day one. That is revenue over time. Dick mentioned our deferred revenue account had gone up. So that is revenue that will be recognized.

That work is done in all three groups, as the work is done on the projects defining the stimulation, best stimulation techniques, testing that out in our laboratories, defining the geology and the hydrocarbon contents in our laboratories, putting the petro physics together.

So it involves all groups of the Company. And that is the purpose of our Reservoir Management Group, is to bring it all together for our clients. So that is the way it works and that is over time.

That is all I can tell you. It will go over a number of years. Our Deepwater Gulf of Mexico study has been going on for 15 years. We added two new players last quarter.

So, that kind of gives you an idea. These things if they are successful plays will go potentially for quite some time.

That is a nice complete answer. How many clients do you have in your Deepwater Gulf of Mexico study?

We have, I think, 40 now.

Okay. Thank you. I have a question on the international market also. You all mentioned that Mexico, I think, was back in the Top 10 client list.

Can you talk about some of your other specific markets that are going well and also a little bit on the reduction on your presence in Venezuela and what that is going to mean for your revenue and your earnings line?

As I mentioned -- this is Monty -- As I mentioned, in most of our international areas we're doing very well. Deepwater on West Africa is a big producer for us.

We are doing very well in the Middle East. Kuwait, Abu Dhabi are very active areas in the Middle East. We're doing very good and could have a record year out of the Middle East.

Asia-Pacific is doing very good in many areas. For us it is a lot of growth in India. But the areas we have been -- Indonesia, Australia and all of Southeast Asia which really feeds into that Malaysia lab are all been very active.

And I just returned 1 1/2 week ago from a visit to that area and the customers are cautious but they are continuing on, at this level at least and maybe even a little growth. They are not saying it's going to boom but it's been very good so we continue to think it is going to continue to be very good.

And Terese, I'm going to ask Dick to make some comments regarding Venezuela and our exposure there and some of the steps we have taken to decrease that exposure.

We talked about minimizing in Venezuela for some time. The net asset values of the whole operation there is probably just over $4 million. So it is not a large investment for us because -- just like we said in the past we're in 50 countries. We're well diversified and this is just an example of an area for us.

We have got an investment, we have laboratories, we have employees. So we do have a fixed cost structure there and the value on our books is around $4 million.

And our view is, let's reduce that as much as possible. As you can imagine, a large component of that relates to receivables. They are paying us but we are being paid in local currency. And as David said in his prepared notes, our concern is the convertability of that local currency. And right now it is very, very restrictive.

So we will continue to downsize our financial exposure and this change in our tax rate for the quarter was just a part of that. It was reducing the deferred tax asset that we don't believe we will be able to realize.

On an operational basis, we are trying to shift a lot of that work into our facilities over in Colombia where the operating environment is certainly better.

And then, the impact on the P&L would be --?

I'm sorry. The revenues are probably a few hundred thousand dollars a month. And they are not making any kind of margin. So when you look at our revenues for the quarter of $167 million, they did not contribute a lot.

Thank you. I appreciate your thorough reply. One last question on international work. And that is plans for Iraq, it seems to be playing more of a part in many of the companies in the oilfield segment. What do you see happening there for Core?

We have been active actually over the last couple of years, working for the Iraqi Southern Oil Company. And most recently some of the work up and Kurdistan we have also been involved in.

So we will go as an independent company in Iraq and continue to provide not only service but to provide product into that market. And as other international markets, we will do that independently. We have an operational base in Abu Dhabi, Kuwait and with the purchase of our facility in Istanbul, we have that area now with a high capacity to handle a high workload.

So we feel we have positioned ourselves over the last several years to take real advantage that over the next two to three to four years we will be a robust oilfield service market.

Thank you very much.

(Operator Instructions). Veny Aleksandrov, Pritchard Capital.

Good morning. I have a question on the international oil side. You mentioned activity was down 10% year over year. From what you are seeing out there, do you think we can see a pickup in activity when we go through the budget cycle or we have to wait until the next budget cycle 2010?

Certainly for 2010, if you just look to our five top clients, their -- usually in their budget planning cycle, and Exxon Mobil is a great example, they will increase their activity levels next year. I don't know what magnitude that was going to be but it is always between 10 and 12%. So when we look at the decrease in overall international activity year over year, which is down somewhere on the order of about 10%, we are seeing that stabilized now.

And with oil prices in the $60s and $70s, yes, we believe international markets could see an up market next year for us. The magnitude at this point? Don't know but all is in favor if we can keep crude oil prices in the $60 and $70 range that we will see enough here internationally for 2010.

Thank you so much. That is all my questions.

Rob McKenzie, FBR Capital Market.

Good morning, guys. This is Doug (multiple speakers) for Rob. My first question is you guys gave some good color on Venezuela. I was hoping you guys could give the same color on Russia and Nigeria and how that will affect the P&L statement?

In Nigeria, we shut down our laboratory -- of course, now it's been about 1 1/2 years, I think. At the time we had a fair number of receivables. The equipment was distributed largely to the Middle East and Far East, our Asia-Pacific area there.

But we ended up with receivables and we have been very diligent. We have been actually pleasantly surprised we have collected virtually all of that money that was owed to us at the time which was one of the main reasons we left -- was difficulty in collecting from the various companies. So we have been happy with that situation. So you will see no affect really, no impact on P&L.

Russia, our business there is fairly static at this point. It's profitable. We don't expect any hits to the P&L coming out of that either. We will see what that market develops over the next year but right now our business is ecstatic. It is profitable and we don't expect any targets.

Thank you. My next question is on Canada. How is the [current] activity out there? How is that shaping up?

It is weak. It is very weak in the conventional side of the business. They have taken a double hit. Most activities are in Alberta and they took a hit because of the change in the Alberta tax rate on their production and then hit on the commodity prices. So the conventional activity is very weak.

Oil Sands, certainly dropped off strongly when oil dropped back. At the current price Oil Sands is a profitable enterprise. Obviously it still goes on. The question is is it going to grow or shrink?

If they get confidence in this price or even a little firming in the price of oil, Oil Sands will once again grow. On the shale plays that we have mainly in BC but also Saskatchewan a little bit and in Qubec.

Those are new plays. They are active, they are interesting and some of them look to be really good. So we mentioned the Muskwa, in particular, looks to be a very good gas shale play.

With the technologies that we have for that, that is going to be a good strong business in our opinion.

On the Muskwa shale play, how would you guys kind of talk about the possibility in terms of, I guess, the basic differentials of shipping gas there?

If we look at the Muskwa it is very early days there. There have been just a few [cores] that have been analyzed from that. So with respect to the potential of this play, it is just way too early days. And I imagine over the next couple of years we will see how that develops.

Great. Thank you, guys.

(Operator Instructions). [Ashish Gupta], Valera [Beach].

Dave, how are you? Question -- you mentioned you have some projects ramping down and other projects ramping up. It seems like there's a lot in the pipeline. I just want to understand is there any risk of a lull late this year, early next year as you have some projects ramping down and others ramping up for a quarter or two in margins or topline? Can you give any color on just the magnitude of some projects that are being completed versus those that are ramping up?

When we look at it internationally, we're working some 1500 contracts currently. That is a pretty common number of projects. None of them are large; it is just a collective number of them.

Hundreds drop off every quarter. Hundreds get added on every quarter? So we don't anticipate any lull for the forward-looking. So we believe that the international business will continue to perform as it is in the third quarter, being very consistent with what we saw in the second quarter and have no reason to believe we would see a lull take place in the fourth quarter or first quarter of next year.

That is all I had. Thank you.

Okay.

At this time, there are no further questions.

Okay, then, we will go ahead and summarize. Core's operations posted a good quarter. We have never been better operationally or technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in the oilfield service sector. This positions Core well for the challenges that await us in the remainder of 2009 and into 2010.

So in closing, we would like to thank all of our shareholders, the analysts that follow Core and especially all of our hard-working employees for spending the morning with us. And we look forward to our next update. Thank you and goodbye.

Thank you. This concludes today's conference call. You may now disconnect.